Page 64 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes 7. EVA provides for better assessment of decisions that affect balance sheet and income
statement or trade-offs between each through the use of the capital charge against NOPAT.
8. Long-term performance that is not compromised in favor of short-term results.
9. EVA decouples bonus plans from budgetary targets.

10. EVA covers all aspects of the business cycle.
11. EVA aligns and speeds decision making, and enhances communication and teamwork.
12. Provision of significant information value beyond traditional accounting measures of
EPS, ROA and ROE.
13. Goal congruence of managerial and shareholder goals achieved by tying compensation of
managers and other employees to EVA measures.

14. Annual performance measured tied to executive compensation.

Did u know? Cola-Cola is one of the many companies that adopted EVA for measuring its
performance. Its aim, which was to create shareholders wealth, was announced in its
annual report. Coca-Cola CEO Roberto Goizueta accredited EVA for turning Coca-Cola
into the number one Market Value Added Company. Coca-Cola’s stock price increased
from $3 to over $60 when it first adopted EVA in the early 1980s. In 1995, Coca-Cola’s
investor received $8.63 wealth for every dollar they invested.

Self Assessment
Fill in the blanks:
5. EVA eliminates economic distortions of ………….to focus decisions on real economic
results
6. In case of EVA, ……………interest rates may be used for different types of assets
7. EVA combines profit centre and …………………concepts.

8. EVA decouples bonus plans from ……………..targets

4.3 Evaluation of EVA

Economic Value Added (EVA) vs. Earning Per Share (EPS)

EPS is calculated by dividing the net profits after interest, depreciation and taxation by the
number of equity shares issued by the company to find out the profits earned per share. This
measure is flawed because it does not consider the equity cost of capital employed (i.e. it
assumes that equity capital comes to the company for free). Naturally, when more funds are
pumped into the company, the size of the business increases without necessary increasing the
profitability. Also, EVA takes into consideration the total capital employed by the company—
total shareholders’ fund (equity and accumulated profits) and total debt—and finds out the
difference between the earning and the cost of the capital employed.

Did u know? EPS can be improved without corresponding improvement in performance
simply by issuing further equity at a premium.

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